Passive Trading vs. Active Trading

Passive Trading vs Active Trading

Most investors that are either beginners or experts identify themselves as two types of traders, each with their own benefits and disadvantages. The first type being the slow-and-steady passive trader who prefers to hold their investments over the long run. The second type being the fast-and-aggressive active trader who prefers to make multiple trades over shorter periods of time. But which type would you identify yourself as?

Active Trader

Active traders use the more aggressive buy and sell strategy, with the purpose of generating profits through correctly anticipating certain market/stock movements. These investors will trade daily/weekly in multiple investments

Advantages

• If done correctly active traders may earn much more profit than passive traders since they are always looking for the best point to sell

• Active traders have more flexibility when making trades, they can choose when to enter and leave the investment at any time

Disadvantages

• Active trading is often more expensive than passive trading as more commissions are paid out per trade

• Risk of losses can be higher as active traders need to correctly predict the direction of the stock in order to gain. One wrong prediction could result in a loss which could negate all gains earned previously

• Time and effort must be implemented to do research on the investment and to make the trades properly

Passive Trader

Passive traders often use the buy-and-hold strategy, they purchase one or multiple investments for the purpose of cashing out many months or even many years later. Most often, passive traders invest in index funds (funds that own fractions of multiple stocks in the market).

Advantages

• Passive traders pay less fees using the buy-and-hold strategy, especially commission fees as they do not trade very often

• Income is more guaranteed and losses are less prominent as studies have shown that over the long run, the stock market shows a general trend of increasing in value over long periods of time

• Investing in index funds such as the S&P 500 and Dow-Jones generally does not require much research, which save time and effort

   

   

   

  Disadvantages

  • Traders must consistently resist the urge to exit the market if the investment becomes unfavorable

  • Returns may not be as high compared to active traders as passive traders may not sell their investment at its best price